Implications of India's new budget and Finance Act

FW speaks with Nihar Jambusaria at BDO Consulting Pvt. Ltd. about the implications of India’s recent budget and new Finance Act.

FW: Broadly speaking, could you outline the main aims of India’s new Finance Act, announced with the 2011 budget? What are the reasons behind its introduction, according to lawmakers?

Jambusaria: The Finance Bill is presented before parliament every year. The main aim of the Finance Act 2011 was to make amendments to the existing provisions of the Income Tax Act, bringing it in line with the proposals in the Direct Tax Code (DTC), effective from 1 April 2012. Provisions, including the addition of new businesses in the section providing investment based tax incentives and notification of ‘Non co-operative Jurisdiction Areas’, were introduced as a move towards meeting some of the proposals of the DTC such as shift of incentives from profit-based to investment-based and anti-avoidance provisions.

FW: Could you provide a general overview of the major changes under the Act, regarding direct and indirect taxes?

Jambusaria: In regard to direct tax, liaison offices, although not required to file a Return of Income, will be required to provide certain details by filing an Annual Information Report with the Income Tax Department. The central government will now notify any foreign country or territory which does not have an arrangement for effective exchange of information with India as a Notified Jurisdiction Area (NJA). Transactions with persons located in NJAs will be subject to a transfer pricing audit. Payments by an assessee to such persons towards expenses will not be allowed as a deduction in computing income unless particular documents are maintained by the payer and particular information is provided to the tax authorities. Receipts of an assessee from such persons will be deemed to be his income, if he is unable to explain the source of the receipts. Regarding indirect tax, some restrictions have been put on the profits of central credit on input services under the Works Contract Composition Scheme. Also, valuations of telecommunication services must be completed at retail price. The Finance Act introduces a new point of Taxation Rule, and the rate of interest payable on delayed payment of service tax has increased from 13 percent per annum to 18 percent.

FW: Will the new Act promote investment in India’s stock market? If so, how?

Jambusaria: Many steps have been taken in the last three years to promote investment in India’s stock market. This Finance Act does not take further significant steps. However, the rules for investment through the portfolio investment of foreign investors who meet KYC requirements through SEBI registered mutual funds have been liberalised. This should promote investment in India’s stock market through mutual funds.

FW: To what extent is the new Act likely to stimulate foreign trade and investment?

Jambusaria: The new Act focuses on retail growth and this should bring more purchase parity in rural India. The introduction of a legal framework for indirect tax will result in improved compliance, thereby reducing litigation and administrative costs. Such inclusive growth and an improved compliance environment will help to attract foreign investment and facilitate trade.

FW: What impact might these provisions have on infrastructure development and financing in the country?

Jambusaria: The government’s Tax exemption on Infrastructure Growth Fund Bonds will give a great boost to infrastructure development. Investment in infrastructure bonds is also eligible for deduction up to Rs 20,000 from the taxable income of individual investors.

FW: In your opinion, what are the advantages and drawbacks of the new Act for Indian businesses?

Jambusaria: Due to the pending implementation of the DTC in 2012, along with the Goods and Services Tax, no long term policy changes have been made through the Finance Act. Therefore, there will be no major impact on Indian business. The DTC will, however, have a long-term impact.

FW: How will the changes affect foreign multinationals with operations in India?

Jambusaria: These changes will not affect foreign multinationals with operations in India, as the Finance Act has not made any long-term policy changes. However, foreign companies from Non Jurisdiction Areas will be required to satisfy KYC norms if they enter into any transaction with Indian residents.

FW: What advice would you give to companies preparing to deal with the provisions outlined in the new Act?

Jambusaria: Companies preparing to deal with the provisions outlined in the new Act must keep in mind a number of changes. First, surcharge has been reduced from 7.5 percent to 5 percent in the case of domestic companies, and from 2.5 percent to 2 percent in the case of foreign companies. Second, no adjustment in actual price was required to be made under the Transfer Pricing regulations, where the difference between the Arms Length Price and the actual price in an international transaction was within a deviation 5 percent. This forbearance limit will be notified by the central government for different transactions effective from 1 April 2011. The limit will not be uniform at 5 percent. It will be different for different transactions. Third, the time limit for filing the Return of Income and completing the transfer pricing audit will now stretch to 30 November of the assessment year rather than 30 September.

FW: Do experts foresee any significant challenges in implementing the new Act?

Jambusaria: The implementation of provisions related to transactions with persons in the Non Jurisdictional Area may prove a challenge. Particularly, the increase of withholding tax to 30 percent may discourage persons located in NJAs from entering into transactions with those that are resident in India.

FW: Looking ahead, in what ways do you expect the new Act to alter the business landscape in India?

Jambusaria: As mentioned previously, the new Act is unlikely to alter the business landscape in India. One needs to wait for the final version of DTC.

Nihar Jambusaria is the national head of Tax Advisory Services at BDO Consulting Pvt. Ltd. Mr Jambusaria has 25 years of practice, specialising in Real Estate, Pharmaceuticals, Manufacturing, Service, Automobiles and other sectors of income tax structuring. He has vast experience in litigation practice , personal taxation, ext-pat taxation and corporate taxation, international inbound and outbound structuring, and transfer pricing. Mr Jambusaria’s career has seen him advise both Indian and international companies and he was chairman of the Western India Regional Council of the ICAI in 2004. He can be contacted on +91 22 6672 9709 or by email: nihar.jambusaria@bdoindia.co.in.